How to Turn Down a Billion Dollars

by Billy Gallagher

  Communication relies on the creation of media and is constrained by the speed at which that media is created and shared. It takes time to package your emotions, feelings, and thoughts into media content like speech, writing, or photography.

  Indeed, humans have always used media to understand themselves and share with others. I’ll spare you the Gaelic with this translation of Robert Burns, “Oh would some power the gift give us, to see ourselves as others see us.”

  When I heard that quote, I couldn’t help but think of self-portraits. Or for us Millennials: the selfie. Self-portraits help us understand the way that others see us—they represent how we feel, where we are, and what we’re doing. They are arguably the most popular form of self-expression.

  In the past, lifelike self-portraits took weeks and millions of brush strokes to complete. In the world of Fast + Easy Media Creation, the selfie is immediate. It represents who we are and how we feel—right now.

  And until now, the photographic process was far too slow for conversation. But with Fast + Easy Media Creation we are able to communicate through photos, not just communicate around them like we did on social media. When we start communicating through media we light up. It’s fun.

  The selfie makes sense as the fundamental unit of communication on Snapchat because it marks the transition between digital media as self-expression and digital media as communication.

  And this brings us to the importance of ephemerality at the core of conversation.

  Snapchat discards content to focus on the feeling that content brings to you, not the way that content looks. This is a conservative idea, the natural response to radical transparency that restores integrity and context to conversation.

  Snapchat sets expectations around conversation that mirror the expectations we have when we’re talking in person.

  That’s what Snapchat is all about. Talking through content, not around it. With friends, not strangers. Identity tied to now, today. Room for growth, emotional risk, expression, mistakes, room for you.

  If 2011–13 was when Evan managed to turn down a three-billion-dollar offer, 2013 onward would need to be a lesson in how to make that a smart decision. Evan, Bobby, and their little team built a wildly popular app worthy of a three-billion-dollar offer. Evan had the vision for what differentiated Snapchat and why its core philosophy was unique. He believed a radical shift was taking place, from permanent posts and profiles to a new world where impermanence and ephemerality allowed users to be their true selves at any point in time. By making everything delete by default, users would post more personal content, and Snapchat would rule this new kingdom. Now, Evan and Team Snapchat needed to execute on both their product and their business in order to avoid being relegated to the history books as a footnote of notable foolishness.

  Just as he thought at a high level about how to position Snapchat against Facebook, Evan also needed to understand more about Facebook’s business and its path moving forward. Snapchat was incredibly popular, but Evan and Bobby wanted to build it into a real business. To do that, they wanted to know what their main competitor’s potential weaknesses were and how well positioned they were to strike.

  Evan wasn’t an expert in this, so he befriended an expert. In April, Evan received advice from Anthony Noto, the co-head of Goldman Sachs’s Global Tech, Media, and Telecom Investment Banking division, and an expert on the way Wall Street valued social media companies. A few months after emailing Evan, Noto joined Twitter as chief financial officer.

  On April 24, Noto emailed Evan to discuss Facebook’s future prospects. Facebook could tell Snapchat a lot about the mobile advertising market and what lay ahead for Snapchat. Noto explained that Facebook ad impressions had declined year over year but were offset by revenue per impression increasing. Ad impressions were declining because people were increasingly accessing Facebook on their smartphones, which had less space for ads than desktops.

  Noto explained that although ad impressions were declining, mobile ads were earning more than desktop ads. Because Snapchat only exists on mobile, the question of why mobile monetizes better than desktop was enormously important to the company. Noto wondered aloud whether this was due to higher prices per click (the amount an advertiser pays when a user taps on an ad) or higher clickthrough rates (the rate at which users actually tap on said ad). This was a crucial question—were advertisers spending in a manner that was likely to continue and lead to long-term value or were they merely trying out a new ad format and then abandoning it? Noto explained that if the cause was to achieve higher clickthrough rates, this would be very positive for Snapchat, as higher clickthrough rates are highly correlated with better ROI, which leads to ad spending.

  Next, Noto expanded upon this idea of higher clickthrough rates, noting that if this was driving spending on ads, it bodes well for all companies that focus on mobile advertising.

  If ads on mobile are more engaging for the consumer and more relevant than desktop ads then the addressable ad market for mobile will be bigger than desktop ad market and the valuations of mobile companies will be greater than desktop, all else equal on audience, size.…

  If Facebook knows this to be true it would result in them being willing to pay higher valuations for mobile companies than other acquirers because Google won’t know nor will Yahoo Microsoft etc. because none of them have the scale in mobile to understand these powerful secular trends and in essence they undervalue mobile vs FB, and thus under invest and fall farther and farther behind.

  Noto finally commented on Facebook’s mobile user growth, noting that its number of monthly active users on mobile grew 34 percent year-over-year to 1 billion, and positing that it was a “remarkable and a clear indication that Facebook is still in early days on mobile penetration and there is a lot more room for growth in mobile MAUs for everyone in mobile. This is great news for Snapchat as you are mobile first and mobile only and if the user base on mobile is bigger than desktop (which I think it is by a magnitude or more) then you will be valued more favorably than before in absolute terms, and long term at scale you will be more valuable than desktop companies at scale.”

  Facebook’s success boded well for Snapchat in absolute terms—the two companies were playing in a highly lucrative and growing market. Snapchat was an addicting, high-frequency app in a very attractive mobile market that was looking better and better by the day. To capitalize on this, Evan set out to raise more money to spend on new hires and acquisitions.

  Between Evan’s desire to challenge conventional wisdom and his bad experience with Lightspeed, he didn’t see the value in raising venture capital the traditional way just because that’s what everyone else did. Typically, startup CEOs would set out to raise a certain amount of money at a target valuation, both within reasonably narrow ranges. They’d talk to a number of venture capitalists and other backers, see who was interested, get all the investors on the same page for the same valuation, and close the round at a certain date. They would raise these rounds every six to twenty-four months (provided they stayed in business that long).

  Evan and Snapchat were frequently able to raise funds on favorable terms because the company was doing extremely well with user growth and retention. They were also riding a major wave in the broader startup ecosystem that my former boss called the “steroid era,” an homage to the 1990s and early 2000s in baseball when seemingly every player had inflated stats and was hitting every baseball for a home run (mostly because they were taking performance-enhancing drugs).

  From 2014 to 2016, Snapchat, which had already raised roughly $150 million, raised an additional $2.485 billion from private markets. Uber tapped the private markets for over $14 billion over that period. By comparison, Amazon went public just three years after its founding, in a 1997 IPO that raised $54 million (valuing it at $438 million). Google’s 2004 IPO, which came six years after its founding, raised just $1.67 billion (valuing it at $23 billion). Facebook went public eight years after Zuckerberg started it, at a $110 billio
n market cap.

  In 2014 alone, Snapchat raised almost $500 million from investors, helping it to offset the $128 million it was in the red for that year. Tech startups were staying private for longer and were raising far more private capital with less oversight and scrutiny. This let Evan build his empire in secret.

  CHAPTER NINETEEN

  SNAPCHAT EVERYWHERE

  MARCH 2014

  VENICE, CA

  In 2012, Snapchat had fewer than ten employees; in 2013, the number jumped to thirty. In 2014, it would soar past one hundred, and Evan and Bobby needed to put more structure in place.

  Part-time jobs that were once done by a full-time person (in addition to their other responsibilities) were now handled by small teams. Entire new divisions sprung up as the team created new features and expanded supporting functions like HR. Evan and Bobby worked hard to align the culture and org chart with their strategy. Evan still liked to have his hands on every feature the company shipped, even as the pace of releases dramatically increased in 2014.

  Snapchat employees are very loyal to the company and to Evan. While many think he is too stubborn and can be too hands-on, they admit that he is usually right about strategic and product decisions. If you look at the sum of major decisions Evan has made, from rejecting acquisition offers to introducing features, he has been right far more than he has been wrong. More importantly, when Evan’s been wrong, the errors have been fairly minor, and they were corrected quickly. But when he’s been right—rejecting Facebook twice, Snapchat Stories, and Live Stories come to mind—he’s been right in a big way. And while it’s frustrating for employees to have their features rejected because they don’t load fast enough on Evan’s phone or he doesn’t like the look of something, most believe he’s looking out for the best interests of Snapchat’s users.

  Evan strongly opposes running tests on users and collecting data to make decisions. Like Land and Jobs before him, he believes Snapchat should creatively think of what people will want next, then build that. He believes data, focus groups, and market research cannot successfully deliver an innovative leap large enough to meet his goals for Snapchat.

  Snapchat exec Sriram Krishnan later wrote about this Snapchat core belief after leaving the company, explaining how most companies measure a proxy metric for actual human behavior, since the latter is nearly impossible to measure perfectly.

  You convert a nebulous human emotion/behavior to a quantifiable metric you can align execution on and stick on a graph and measure teams on. Engineers and data scientists can’t do anything with “this makes people feel warm and fuzzy.” They can do a lot with “this feature improves metric X by 5% week-over-week.” Figuring out the connection between the two is often the art and science of product management.

  Krishnan explained how these metrics often have unforeseen side effects, as people focus on simply making the metric increase, but not in the way the original system designers intended:

  For example, in terms of what designers wanted, what they built/measured and what they unintentionally caused:

  Quality journalism → Measure Clicks → Creation of click-bait content

  Marissa Mayer once tested forty-one different shades of blue on Google users to see which one would be most effective. Product managers at Facebook and Twitter regularly run tests on users to decide which feature or design they should roll out. “Data wins arguments” is a frequent mantra around Silicon Valley.

  Unlike at most tech companies, engineers aren’t rock stars at Snapchat. The designers are. Evan, a product design major, ran the design team as a flat team of twenty until 2016, when they began reporting to new VP of Product Tom Conrad. This small, tight-knit team is the core of Snapchat, with the most responsibility and the closest proximity to the leader. The design team works out of a secretive, unmarked office on Abbott Kinney Boulevard in Venice. Evan works out of that office a couple days a week, keeping the design team informed of the happenings of the company and working on product issues. Designers will jam on ideas with Evan, and he’ll get deep in the weeds product-wise, often staying with designers until one or two in the morning in order to get a feature to display the right way. Evan’s energy was infectious to the rest of the design team as they threw themselves into new products.

  On many projects, designers simply tell engineers what they want them to build rather than collaborating together to decide what they should create. Many product designers function more like product managers—a well-named role that essentially gives the person domain over a team and specific product. At many tech companies, product managers come from an engineering background rather than a design one.

  The engineering team was organized around products. Team Snapchat was growing so quickly that it was in a near-constant state of flux, but the core engineering teams consisted of camera, monetization, identity, security, broadcast, and messaging. There were also smaller groups, like engineering support, and a few subgroups, like a data team that was under monetization, and acquisitions that were allowed to remain independent under another group’s umbrella. Tim Sehn, Snapchat’s head of engineering, had a weekly meeting with each engineering sub-team rather than the entire engineering team at once.

  The biggest and fastest growing team was monetization, a very broad team that handled anything Snapchat could use to make money. The messaging team worked on the actual process behind sending Snapchat photos, videos, and the chat product to make it the best possible way to communicate with friends. The broadcast team handled Snapchat Stories. The identity team focused on users’ little profiles and created gamification features like emojis next to a friend’s name that denoted if they were your “best friend” on Snapchat (based on who you snapped the most) or how many consecutive days you two had a “streak” (sending Snapchats back and forth).

  The camera team focused on making Snapchat “the world’s camera” by adding enhancements like zooming on video and fun creative tools. Their goal was to make users choose Snapchat as their default camera over the iOS and Android standard cameras (or any other camera).

  Armed with a vision and a war chest, Evan made three key acquisitions in 2014. One was for the “right now,” one was for the medium future, and one was a moonshot for the distant future.

  Many tech companies “acquihire” startups—that is, they pay out a small but still typically multimillion-dollar figure to acquire a startup whose technology and product they have no intention of using; they simply want to hire the talented people at that startup. Evan had no interest in acquihires. If Snapchat was going to shell out cash for a company, it was going to use their product. Evan and Bobby leaned on a pair of longtime members of their Snapchat inner circle for help with acquisitions: Steve Hwang, who joined Snapchat from Cooley, one of Snapchat’s law firms, and Dena Gallucci, who started working with Evan on Future Freshman and joined Snapchat back in 2012.

  Evan was also fairly stingy with the purse strings. In the fall of 2014, Evan visited the anonymous messaging app Secret during their retreat in Las Vegas. A lot of bright people in Silicon Valley at the time believed anonymous apps, like Secret, the college-targeted Yik Yak, and the even younger-skewing app Whisper, would be the next wave of big social trends. In many ways, anonymous apps were similar to impermanent ones, as they thrived by rejecting the identity and permanence of Facebook and other entrenched social networks. But it was much harder to build a long-lasting community when everyone was anonymous. Evan didn’t want to pay more than $60 million for Secret, which had been valued at $120 million, so a deal was never reached. Less than a year later, Secret shut down.

  In April 2014, Evan set his sights on a startup that Snapchat needed immediately, spending $30 million to acquire AddLive, a company that provided the backend infrastructure for a high-quality video chat.

  In early 2013, Evan and the small Snapchat team started talking about what a Snapchat phone would look like; not a hardware device, but the core features of a phone: messaging and calling. Evan had been an insta
nt-messaging addict in high school and yearned for the early days of instant messaging when both people were engaged in the conversation, online at the same time and typing back replies instantaneously. As instant messaging moved from AIM and other desktop apps to mobile texting, it became more transactional and moved farther and farther from how people talked in real life.

  By not allowing users to message unless they were sending photos or videos, Snapchat had taught users to communicate through media rather than around it. Photos became both the medium and the message. Users could send pictures back and forth with tons of context, feeling as though they were hanging out in the same room and offering friends a window into their present lives. Adding video chat to Snapchat would take that a step further and make it even more powerful.

  “What does a phone look like without a ringer?” Evan later said to a reporter. “The biggest constraint of the next 100 years of computing is the idea of metaphors.”

  Evan challenged his team to think beyond mere comparisons to other video-chat apps like FaceTime and to simply think about how friends should hang out through Snapchat, with its focus on impermanence and fun. For many young people, Snapchat had replaced a series of text messages asking a friend what they were doing and then receiving a description in response. What if Snapchat could replace the action of picking up a phone, dialing a friend, and connecting, and just cut right to the core idea behind those actions—I want to talk with my friend.

  On May 1, 2014, Snapchat rolled out a new update to users, letting them text and video call each other. Once you left a conversation, the messages disappeared (although you could tap to save them in the thread). Users could decide whether to let any Snapchat user who added them message them, or restrict it to only people who they mutually added as a Snapchat friend. Video calls were not placed like normal; rather, if both friends were in a chat thread simultaneously, a small circle would glow blue. If you pressed and held that button, you would start sending a video chat to your friend. They did not have to pick up or decline your call—they would immediately start seeing your video stream. They could hold their blue button to join your call, just watch your end of the call, or leave the chat to end your call.